Currency swap
A currency swap can transform the currency exposure of borrowing or investment. A common structure exchanges principal at inception, exchanges interest during the term and re-exchanges principal on agreed terms at maturity; other structures differ. It can match operating receipts to debt service, but introduces counterparty and contractual risks and may leave basis or timing exposure. Distinguish it from a short-dated FX swap that combines a spot currency exchange with an opposite forward exchange. Do not assume a currency swap is simply a one-off conversion at today's rate.
Worked example
A company raises dollar finance but needs euro debt service to match its euro operating receipts. A suitable cross-currency swap can exchange dollar obligations for euro obligations under agreed terms, while the original dollar borrowing remains legally outstanding.
Common mistake
Confusing the swap's transformed economic exposure with cancellation of the original borrowing, or treating all swap structures as identical.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |